Are Strong Financial Prospects The Force That Is Driving The Momentum In Beijing Huafeng Test & Control Technology Co.,Ltd.'s SHSE:688200) Stock?

Beijing Huafeng Test & Control TechnologyLtd (SHSE:688200) has had a great run on the share market with its stock up by a significant 19% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Beijing Huafeng Test & Control TechnologyLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Beijing Huafeng Test & Control TechnologyLtd

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Beijing Huafeng Test & Control TechnologyLtd is:

7.8% = CN¥268m ÷ CN¥3.4b (Based on the trailing twelve months to September 2024).

The 'return' is the yearly profit. So, this means that for every CN¥1 of its shareholder's investments, the company generates a profit of CN¥0.08.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Beijing Huafeng Test & Control TechnologyLtd's Earnings Growth And 7.8% ROE

When you first look at it, Beijing Huafeng Test & Control TechnologyLtd's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.4%, is definitely interesting. This probably goes some way in explaining Beijing Huafeng Test & Control TechnologyLtd's moderate 15% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing Beijing Huafeng Test & Control TechnologyLtd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is 688200 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Beijing Huafeng Test & Control TechnologyLtd Making Efficient Use Of Its Profits?

Beijing Huafeng Test & Control TechnologyLtd has a three-year median payout ratio of 30%, which implies that it retains the remaining 70% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Beijing Huafeng Test & Control TechnologyLtd has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 27%. However, Beijing Huafeng Test & Control TechnologyLtd's ROE is predicted to rise to 13% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Beijing Huafeng Test & Control TechnologyLtd's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.